Despite heavy shorts, GameStop still a buy: Pros

Bears have been saying for years that GameStop is dead in the water, but Wall Street analysts still love the stock.

In fact, the video game-focused retailer boasts an average "buy" rating of analysts surveyed by FactSet at the same time that nearly 30 percent of its shares are out on loan. The bear thesis is simple: Physical in-store sales for music and movies are eroding as users opt to download and stream, so it only makes sense that a retailer focused on selling game discs should be nearing the same irrelevance as the record store.

Scott Mlyn | CNBC

A GameStop store in New York.

But a funny thing has happened: Short sellers are receding (in 2012 about 41 percent of shares were on loan), and Wall Street is expecting GameStop to report 5 percent revenue growth on Thursday. Still, that prediction does not mean the bears are wrong, analysts said, just that their timeframe is off.

"The bears are going to win over the long, long, long run; the physical games business is going to go away—but not in five years, or even in 10," Wedbush analyst Michael Pachter said. "I don't think it is a good short."

GameStop's 28.5 percent of shares outstanding on loan means that it is the second-most shorted stock reporting earnings this week, behind only Zoe's Kitchen, according to data from Markit.

Short-sellers may be cheering recent industry trends, as video game sales overall are falling at the same time digital is beginning to take a foothold, Pachter said. Still, the company can expect up to five more years of sales growth from increasing market share before the trends catch up to it.

But it is not necessarily even true that digital's growth over physical game sales will continue forever, said B. Riley & Co. analyst Scott Tilghman. Game discs offer a clear value proposition to the gaming community because they offer portability (bringing a game to a friend's house) and they can be traded in for cash, he said. While the average trade-in nets about $20 for a gamer down the road, digital downloads are not often priced $20 lower than physical copies, he said.

"Gamers continue to vote with their dollars and they're voting for physical," Tilghman said.

But there may be even more to Gamestop than just its games, analysts said. In fact, the company has assembled what could be an important future driver of growth in its hardware refurbishment business.

Gamers have long turned to Gamestop to fix broken consoles or buy used models, but now the company is turning its attention to other hardware like mobile phones and tablets. There will always be a market for this business, Tilghman said, and it is not easily disrupted: It takes a long time to build a streamlined repair workflow, and obtaining a license for selling used goods can be a "cumbersome process" that requires navigating pawn shop laws in each county, he said.